Flat Rate vs. Hourly Pricing for Contractors

Diana LamirandJuly 8th, 2020
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When debating hourly vs. flat-rate pricing, contractors in the skilled trades make strong arguments for and against both options. Some believe time and material pricing represents the most transparent way to charge customers, whereas others think a flat-rate fee provides the best value for your services.

So, how do you decide between the two payment structures?

Whichever way you choose to bill customers, the process requires charging the right amount so your company meets a specific profit margin. You can maintain the status quo by simply charging enough to cover expenses, or grow your company with higher net profits by charging the true value of your services.

Below, we explore the advantages and disadvantages of flat-rate pricing versus time and material billing, and which payment type works best to meet your company’s needs and your customers’ preferences.

What does flat rate mean?

Flat-rate pricing means your company charges the customer a set price for a specific job, regardless of how many hours it takes to complete the project. A single, fixed price includes the direct costs for parts and labor, and the indirect costs of overhead expenses.

When explaining this flat-rate meaning to customers, instruct your techs to describe it as the direct cost your company charges for providing a service, plus a small added markup based on a certain percentage or a set amount to cover company costs. 

For instance, a flat-rate plumbing fee of $250 to fix a leaky faucet might include the parts needed for repair, estimated time on the job, and a small percentage fee for overhead expenses, such as fuel, truck maintenance, insurance, etc.

In comparison, hourly pricing or a time and material contract means your company charges the customer for parts and materials, plus a set hourly rate for the amount of time spent on the job.

What is flat-rate pay?

Flat-rate pay differs from hourly pay, as it places the focus on technician productivity and rewards employees for performing at a high level, no matter how many hours they work each week. 

Often referred to as performance-based pay, a flat-rate pay scale allows your techs to share in the revenue they bring in for the company—instead of just clocking in and getting paid for working a set amount of hours.

Darius Lyvers, Chief Operating Officer at F.H. Furr Plumbing, Heating, Air Conditioning & Electrical in Virginia, used both pay systems to compensate his techs. He prefers performance-base pay, because it generates the most revenue for his employees and more sales for his company.

“The only way you can make more money hourly is by working longer hours and spending more time away from the things you love to do,” Lyvers says. 

“If you want to get rewarded for what you are doing, and you often feel you’re underpaid but have unlimited earning potential, there’s only one way to do that,” he explains. “It’s to share in whatever revenues you’re bringing in for the company.”

With performance pay tied to a company’s flat-rate pricing for home services, the potential to earn even more increases exponentially. 

Pros and Cons of Flat Rate vs. Hourly Pricing

Each type of customer billing offers advantages and disadvantages for not only your company and employees, but also your customers. Just keep in mind it’s hard to please everyone, so do what’s best to improve your bottom line.

Pros of Flat Rate

For the customer:

  • Answers two important questions: What’s wrong and how much will it cost?

  • Closes the door on price concerns, because they know the fixed cost in advance.

  • Eases the pressure of a home-service call, removing the need to closely monitor the tech’s progress.

  • Eliminates repair bill surprises, even if a tech needs more time to complete the work.

  • Simple and easy for customers to understand, and for your techs to sell.

For the contractor:

  • Rewards high performance and efficiency, allowing your company to book more jobs per week and earn more revenue. Time savings = more profits.

  • Allows you to set prices based on the true value of your services and scope of work.

  • Eliminates the problem of unapplied labor (underperforming techs).

  • Allows you to sell a service with an end result, with no need to justify your hourly rate.

  • Shortens the billing cycle, allowing customers to prepay the fixed cost or pay the tech on site for completed work.

Cons of Flat Rate

For the customer:

  • With less itemization for your flat-rate fee, customers may view it as a sales gimmick or upselling.

  • It doesn’t allow for customers to negotiate or haggle over the price.

  • The service may seem overpriced, especially if the customer doesn’t understand the value your company brings to the job.

  • Creating a high-pressure environment to perform may leave your clients feeling like your techs rushed through the job.

For the contractor:

  • If the job takes longer than estimated as part of your flat-rate costs, you may end up earning less than your regular hourly rate.

  • Clients may insist on hourly invoicing, or want to haggle over your flat-rate pricing.

  • Flat rates are approximate, so you may get locked into a certain price even though the job turned out to be more complicated than you originally thought. 

  • With emphasis placed on performance, slower techs may struggle to earn.

  • Slow periods, especially for HVAC techs, may require creative job-reallocations to meet performance goals.

Pros of Hourly

For the customer:

  • Customers understand hourly rates, or T&M pricing, and use it as a baseline for comparable work.

  • Some customers appreciate an itemized list of exactly what’s included in their home repair bill.

  • Billing hourly tends to work better for clients with long-term projects, rather than short, sporadic jobs.

For the contractor:

  • Allows you to track the exact number of hours working on a job, and invoice the customer upon completion or at certain phases on bigger jobs.

  • Hourly rates allow you to account for changes and other variables (and charge for them) as they arise.

  • Your techs, CSRs, and other employees know their hourly rate and how many hours they need to work each week to reach a certain level of pay.

Cons of Hourly

For the customer:

  • Customers may feel compelled to stand watch over your techs to make sure they’re not wasting time on their dime.

  • Techs who don’t perform at a high level may cost customers more money for less work.

  • Unexpected changes and other variables may significantly increase the cost of the project.

  • Customers prefer predictability, rather than uncertainty of the outcome. 

For the contractor: 

  • Charging by the hour requires keeping detailed accounts, and many contractors stay too busy to do this regularly and accurately.

  • Billing hourly provides no incentive for your techs to perform quickly and efficiently, which means your company may be losing out on new revenue.

  • T&M pricing limits your profitability, but pricing focused on production boosts your revenue potential.

  • Nagging techs to correctly invoice customers remains one of your essential duties.

How does flat rate work?

As mentioned previously, flat-rate pricing represents the direct cost your company charges for providing a service, plus markup. Many contractors believe it’s the most accurate way to charge the customer, because it values the true scope of work.

When determining how to calculate flat rate hours, start by figuring out the gross margin dollars you want to generate per day, says best-selling author and motivational speaker Weldon Long, who also owns Peak Home Performance LLC in Colorado Springs.

“You’ve got to know how many gross margin dollars per day you need to generate to cover your operating expenses,” Long says. “Maybe do three jobs a day, and generate $3,000 to $4,000 gross margin on average. Then, price the job with that gross margin, the cost of goods, cost of labor, and profit. It’s a very effective system.”

Long also believes in performance pay or paying his staff commissions based on a percentage of gross margin profits. He once did a ride-along with an hourly install crew, and says most of the conversations centered around what they did the night before or a girl they met. When he did the same with a flat-rate crew, they talked about which parts they needed for the job at hand.

“It changes the behaviors when there’s a relationship between my compensation and my productivity,” Long says. “Commission all the way, in my book.”

It’s possible to create your own flat-rate pricebook for techs to follow, but it requires regular updates (at least once or twice a year) to stay on top of pricing changes. 

Investing in flat-rate pricing software, such as ServiceTitan’s Pricebook Pro, simplifies the billing process, saves time, and improves efficiency. It also allows your techs to focus on the job, instead of worrying about calculating a correct customer invoice. Other favorite features in the Pricebook Pro include customization, the ability to offer multiple options, and ease of updates.

A professional pricebook gives your techs a tremendous resource, provides better value to your customers, and improves your company’s bottom line, says Kathy Nielsen, a business development consultant and operations expert. 

“Your pricebook is the foundation for everything you do in your company,” Nielsen says. “Your pricing guide drives your tech efficiency, profitability, reporting, truck replenishment and inventory.”

Examples of Flat-Rate Home Services

With a time and material ticket, your team must supply a detailed estimate to the customer, including all parts and supplies needed for the project. Sometimes they forget details and underbid the job or get a price wrong, which ultimately leaves your customer upset about paying a higher invoice than the original estimate.

Flat-rate pricing prevents this from happening by improving efficiency and taking the guesswork out of the equation. Because customers already know the fixed rate, they’re also less likely to micromanage techs in their home, and your techs remain focused on productivity and not the clock.

To meet your profit margin goals, calculate flat-rate hours by including all of the variables, such as parts and materials costs, local taxes, local labor costs, transportation costs, and any unique overhead expenses.

An example of a plumbing flat rate for installing a new toilet might include setting specific prices for:

  • Cost of new toilet

  • Labor (hourly rate) 

    • What is a fair hourly rate for a plumber? According to Home Guide, the cost of a plumber ranges from $500 to $800 for large repairs, and $125 to $350 for small jobs. 

  • Hours spent on the job

  • Permit fees (if necessary)

  • Commissions

  • Per billable hour overhead costs

  • Profit as a percentage of final selling price

With all of these variables accounted for, the flat-rate price you quote for installing a new toilet might range from $500 to $700. If a customer balks at the high price, simply explain the value of installing a new plumbing fixture that’s likely to last for 15 to 20 years.

Flat-rate HVAC pricing also needs to account for many variables, such as pounds of Freon used, ductwork, circuit boards, etc. When flat-rate pricing HVAC work, try to include a price range for every possible job, from replacing a simple thermostat to installing a high-efficiency HVAC system.

Electrical flat rate pricing also requires itemizing every service your company provides to the customer. When you install a ceiling fan, do you include the price of the outlet box? If you hook up a home entertainment system, are the cost of speaker wires and mounting brackets included? Flat-rate pricing for electricians can help power your company to the next level. 

ServiceTitan is a comprehensive software solution built specifically to help service companies streamline their operations, boost revenue, and substantially elevate the trajectory of their business. Our comprehensive, cloud-based platform is used by thousands of electrical, HVAC, plumbing, garage door, and chimney sweep shops across the country—and has increased their revenue by an average of 25% in just their first year with us.

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